Wednesday, December 31, 2008

Well isn’t this a philosophical question? A year has ‘passed’ like ‘मेरा सुन्दर सपना बीत गया’ and still there is no sadness in the air, no obituaries written…rather everyone seems to be pumped up to celebrate the ‘birth’ of the New Year. That’s life…new generation leads…while elders guide.

Is it possible to drive ahead by looking into the rear view mirror? In Olympics, do we have a race which runs backwards? There is an old saying that one should always look towards the rising sun. Rising Sun symbolizes hope, energy, vitality and positivism. That’s what the New Year has in store for us.

The year ahead is full of unknowns…yet people see it filled with opportunity, hope and boundless possibilities rather than fear. It is this attitude of humankind which is fascinating. If all of us could integrate this attitude in every sphere of life, we would be a bundle of joy.

The coming year will also pass by. It’s like the cycle of life and death, immortalized by a beautiful song of GolMaal.

वक्त जो बीत गया वो फिर आता नहीं…कोई लम्हा ख़ुद को दोहराता नहीं …It’s good to reflect at the year…to learn from history and mistakes… they serve as lighthouses in the journey beyond. Savour every moment that you spent …..

We still have lot of ground to cover as a nation.. we still are a developing country...We all look forward to the New Day…New Year with lot of expectation and hope...so aptly penned by Sahir Ludhyanvi...sung beautifully by Mukesh Sahab and AshaJi ( Music by Khyaam Sahab ) for the movie फिर सुबह होगी ( 1958 )....

Tuesday, December 30, 2008

Is it End of 2008 or Beginning of 2009… As the year comes to an end…this question always comes to my mind. How should one look at it?

I think it’s good to do both…while the coming year holds lot of promise, the year gone by serves as a great teacher.

Rarely do we look back individually to analyze how did the year go, what were the lessons learnt, what we did right, where did we go wrong and what we could have done better. So let me put down my intellections on what I think about the year gone by and what plans I have for the New Year.

I am yet to come across a more intriguing year than the current one. The year experienced such a blend of events, each watershed in its own right, leaving my head tossed. Rarely do we see spectacular highs and worrisome lows within the same year for e.g. oil touched high of $150/barrel giving shock to world energy managers and low of $38/barrel, making it cheaper than a bottle of water. 2008 was a watershed year in many ways.

Let’s talk about our country first. There may be many, but I am picking up which has left impression on me. Starting with good occurrences; I begin with sports. Sports has been an absolute victor this year. Abhinav Bindra, Vijendar, Saina Nehwal, Vishwanathan Anand, Pankaj Advani, Jeev Milkha Singh, Gagan Narang, M.S. Dhoni leading the show in respective disciplines making India proud at Olympic and World events. Nothing to beat India’s first individual Olympic gold. It’s very important that we build up on this. For us to be counted as developed nation wealth is not the only criteria, it’s important to excel in all the other faculties and sports being foremost.

In the world of politics, signing of nuclear deal and people coming out in large nos. to exercise Universal Adult Franchise made the year significant. There has been a significant change in the process of elections. Delimitation has happened and therefore urban voters will get more say. Increasingly elections are being fought on developmental issues. Reelection of governments in Gujarat, Delhi and M.P. are testimony to this fact. It was also heartening to see record high J&K voter turnouts sending a clear signal that they need good governance and not divisive politicking.

We took defining steps towards becoming a formidable player in space technology with successful Chandrayaan mission. The mission besides launching a moon probe also launched the Indian flag on the moon and delivered ten satellites in the orbit - all this in half the cost of a typical American, European or Russian mission.

In world of business, with economy going great guns in first half of the year, Indian entrepreneurs proved venturous making audacious attempts at acquiring businesses throughout the globe. Most notably, Tatas took over Corus and British iconic automotive brands. Unfortunately the Indian stalwart was humbled at home turf by crass politics played by likes of Mamata and Left. Indian Inc. at home also shed inhibitions of keeping controlling stakes with themselves and did what made sense for company and in turn shareholders, notably the Ranbaxy-Daichi deal. PE funds made a beeline for India.

Judiciary took concrete steps to clean their house. They could have done more, but still not a bad beginning, unlike legislature and executive which show no signs of improving or taking corrective actions.

Each coin has two sides, so amongst the same categories there have been stains as well. Amongst the painful events – scourge of terrorism would top the list. Blasts all over and Mumbai carnage woke us up from complacency. The only blessing in disguise was that it brought the country together which otherwise was appearing to be a bit fractured.

Politicians came in for severe criticism post Mumbai attacks and were questioned for the first time by the people. Demand was unanimous in their call for greater accountability. Political landscape was disappointing with Parliament reaching new lows. Hardly any debates or the ones on which it did happen, the quality was so low that it’s hardly worth mentioning. Opposition parties mindlessly kept opposing and ruling alliances rarely made any effort to build consensus. The way ‘trust vote’ was won, even Manmohan sullied his clean image. ‘Cash’ landed at the well of the house and yet nobody has been found guilty. We saw fatuous politics played by Left and Mamta, votebank appeasement politics by the likes of Antulay and somewhat disruptive politics played by BJP. Ruling alliance was no better keeping themselves busy in saving the government at centre rather than effectively ruling the country. Cannot complete this without mentioning Mr Shivraj Patil, who redefined incompetency and ineffectiveness by taking it to Himalayan heights.

In business, 3 major events dominated the headlines. First, effect of globalization was at display, growth slowed down, sensex at 1/3rd of its highs and thousands losing their jobs. Second, Tatas moving the Nano plant to Gujarat, courtesy crass politics of Mamta and Left. Third one, causing considerable damage to Brand India, painstakingly built by India Inc., was the action by the Satyam board to merge with Maytas. I am still at loss to believe on how they could shoot themselves in foot. Such a blatant disregard and not one dissenting vote, still rubbing my eyes in disbelief. It was left to shareholders to teach a lesson.

Moving on, professionally and personally, I started this year on a very good note. Professionally, I moved on to a new role to build and kickstart couple of business lines with a dream to create multibillion dollar businesses out of them in coming years. The year held lot pf promise. The bouquet of verticals gave me opportunity to work on ‘Build’, ‘Turnaround’ ‘Sustain Success’ and ‘Ramp Up’ strategies thereby adding to my skills. Had the opportunity to work with the smartest minds in the trade – CEO extraordinaire and a fabulous team to support, all breathing passion. The objectives were clear and I had clear mental image of the outcome. Overall enthusiasm within the company was high, given our 2007 results and collectively we all wanted to make 2008 even bigger and erase the memories of the lows of 2005-6 forever. I took major strategic decisions to realign my portfolio towards growth and profitability. It was turning out to be great year, however events post October were shattering. Markets seized and we were not immune as well. We thrive of deals, meeting customers and drive the team and all that came to a standstill. But as I said earlier it has served as a great learning experience. We should not allow this to take over our minds. Weak minds will then lead to weak actions and then begins a vicious vortex leading to failure and collapse.

Personally, I was able to work on my fitness upping my fitness levels. I could rebuild stamina to run 5-7 Kms with ease. My golf got a serious push. The mantra in both the cases was to take a public pledge. Friendships remained intact and thrived. Read lot of books. Revived my interest in blogging, infact most of posts are of this year. So all in all, it had all the ingredients of a very satisfying year.

But all that got thunderous knock with the downturn and economic seizure pervading all around. With gloom all around, it became difficult to remain happy. But I have decided to stay positive.

Never have I have waited for the New Year with so much of eagerness and hope as is the case in this year. Not that I am expecting any miracle as a cure of all worries. So I plan to attack my worries head-on. Foremost by staying positive, which would come by continuing to build on what I started this year - Keep working on fitness, improve golf handicap, keep blogging and enjoy my work. Want to play to my imagination, which will come by practicing mental mastery and hence plan to add ‘dhyan’ in my routine. My dad, who practices ‘Vihangam Yog’ under aegis of Vihangam Yog Sansthan and current Parampara Sadguru Swami Swatantra Dev Maha Ji, is an ardent believer in the power of ‘Dhyan’. It teaches the yoga of soul, essentially Dhyan, which has the power to heal and liberate the soul. I want to try this, consciously, this year. Professionally, 2009 is going to be the toughest year. I want to keep challenging myself, take my fears and my weaknesses head-on and keep learning, to keep my professional journey exciting and rewarding.

So here I am, with mixed emotions. I want to thank GOD, my family, my friends, my colleagues, and everyone who connected with me and made 2008 great and memorable. In the same breath, I am also very excited, filled with lot of hope, anticipation and joy to welcome the New Year with open hands. Let 2009 bring lot of joy and happiness to everyone and peace to mankind.

Friday, December 12, 2008

I have been having many a round of discussions with my friends, Aman and Nitin, on this topic. I, with finance background, end up having the task of explaining of what caused this. It’s those endless discussions, leaving our spouses frowning, which forced me to write this blog. Attempt has been to put together in a layman’s language on various aspects of this economic seizure or financial tsunami, popularly called these days. We will stray here and there to understand various concepts as it comes along.

Any economist worth his salt probably knew that recession was on its way. What probably they couldn’t figure out was the depth of malaise and consequent magnitude of seizure, leading to collapse of global economies. But what intrigues me is only very few had the guts to take a position and write about it convincingly, against the popular public opinion, while it was sunshine. History has it that public opinion is based on ‘expectations and euphoria’ and not on facts and it’s the duty of the academics ( in older days philosophers did it ) to pen truth based on insights through scientific research and data and not get swayed by popular opinion.

Majorities have disappointed, but some of them didn’t succumb to populist thoughts. The most notable of them is Mr. Paul Krugman, the popular New York Times columnist, Professor of Economics and International Affairs at Princeton University and this year’s winner of The Sveriges Riksbank Prize in Economic Sciences ( in memory of Alfred Nobel ), popularly known as the Nobel Prize. Though he won Nobel for his seminal work ‘analysis on trade patterns and locations of economic activity’, it’s his writings in NYT, which were sharp, incisive and blunt in his predictions about this impending collapse and consequences thereon which got him accolades within masses and peer group.

Publications like The Economist in their book, ‘Economics – Making sense of the Modern Economy’ by Simon Cox, also talks about the lopsided economy and detail the phoney nature of the bullishness seen around, why it would be short-lived and why the recession this time could be long, deep and painful.

Though all economic activities are interconnected and therefore roots of any economic cycle of boom and bust can be traced back in history as far as we want to go. No point going back to Great Depression of the 1920’s. Let me take the collapse of the US stock market in 2000-01 as the starting point.

The 2000-01 collapse was mainly led by ‘tech-bubble’. The US government and Fed responded by monetary and fiscal interventions cutting interest rates and slashing taxes respectively. Not surprising, because this is what everyone does or is expected to do. This is what we, in India, are currently doing. Rather all central banks and governments are doing. That did work in 2000-01. The recession was shallow and short-lived. By cutting interest rates and slashing taxes, extra money was made available, but this was not earned i.e. wealth was not created. People continued spending (or consuming) and economy did shore up.It’s important to remember that this spending was not on account of increased pay or increased saving but extra dollars made available by tax cuts and borrowings. An economy bouncing on these measures essentially postpones the problem, doesn’t solve it. So this recession was pushed forward. Obviously recessions do purge rottenness and increase efficiencies and productivity; this was not allowed to happen. Hence a nastier one had to happen – when, can’t be predicted exactly? One can always argue that it is easier to say this in hindsight, but it is tough to predict whether the recession would be shallow or deeper? So we have economists on both sides – one who are happy about interventions and applaud the steps and other who think that it’s better to have deep but short lived recession rather than no at all, as it brings things in order. An economy should be spending on savings. But US was saving less and less, people felt comfort in rising stock prices 1990s and resultant wealth generation.

Cut in interest rates and prolonged period of low interest rates resulted in increased credit availability to consumers (and industrialists). Increasingly debt also gained acceptance within consumers. More and more started availing it - credit cards, auto, personal loans, housing etc. . Cheap credit availability led to a borrowing-driven boom. Fundamentally boom should ride on the back of increased savings and not borrowings. Increased credit availability, leading to increased borrowings and increased spending resulted in increased demand which in turn resulted in asset prices going northwards. One such asset class was housing and other was stocks, which then had rebounded partially and were at their peaks. Housing prices started building up and together with high stock prices made people feel wealthier. That led higher spending and borrowings (and larger borrowings taking out cash from increased asset prices). The cycle started assuming alarming proportions. Everyone started owning increasingly expensive houses in relation to their income. Finance companies became laxer and structured ways to channelize credit flow to all – even the weakest in the credit chain. New ways to lend to sub-prime, NINJA, Alt A and other forms of adjustable-rate mortgages were devised. Credit checks, income verification, collateral verifications were done away with. Obviously they assumed rising housing prices to be the mitigant (underlying assumption). Bumper demand led to a rapid and steep rise in prices. Houses were now overvalued by 30%-45%. This was not the case of US alone; it was happening the world over – US, UK, ANZ, France etc. India too had seen sharp rise in housing prices. In places like Gurgaon houses over 75 Lacs to couple of Crores were coming up everywhere. So much so that The Times of India wrote an obituary of a Crore, an article written over demise of Rs 1 Crore. The housing price rise would have been even steeper had it not been Mr. Y V. Reddy’s (the then RBI Governor) timely intervention restricting flow of money to RE developers.

Obviously credit was available to industrialists as well. So expansion plans were put in place. M&As and Leveraged transactions (meaning lot of debt on back of small equity or cash flow) were back in vogue. Corporate borrowings increased, however they were still in check and better off than consumers. They did hold themselves back. It’s only the financial institutions (both banks and investment banks) which went berserk in terms of extending credit against housing, credit cards, and leveraged transactions.

As banks went on with their lending spree, especially consumer loans (imagine all sorts of loans – personal loans, auto loans, housing loans, credit cards, equipment leases, student loans etc.), two things started to happen; 1. Banks required more and more capital to lend and were strapped as deposit mobilization was not enough (infact it had slowed down from existing levels) to meet growth momentum and 2. they started running huge credit risks. That’s where exotic instruments came to play. Everyone has by now heard or read about Securitization, Collateral Debt Obligations (CDOs), Structured Investment Vehicles (SIVs), Mortgage Backed Securities (MBS) etc. and their multiple variants depending on underlying collateral. They are all conceptually the same. Differences are minor; hence I will take you through the basic concept.

Well nature of securitization has undergone many changes due to ever changing laws. So I will talk about the nature of securitization prevailing then. In initial days originator (bank) used to keep a loan till maturity on books. Not any more. Now it pools the asset (lets pick up one asset class and then continually use it throughout, so let it be mortgages) and sells it to a freshly created Special Purpose Vehicle (SPV). Sometimes it sells to a third party (another bank or financial institution, investment banks or even government institutions, for eg. Fannie Mae). These 3rd parties then sell it to an SPV . This helps both the originator and the investor as it creates a bankruptcy remote structure, meaning under event of default it’s the SPV which will bear the losses and not the 3rd party and in case originator goes bankrupt, investor's stream is protected. The SPV then issues securities (or bonds) backed by payment rights/receivable pool to investors (could be another bank, debt mutual funds, pension funds, hedge funds etc.). Since in this example the bonds are backed by stream of mortgage payments, they are called Mortgage Backed Securities (MBS), generically it can be called Asset Backed Securities ( ABS). This process of sale and creation of securities as described above is called securitization. A sample cash flow diagram of a sample CDO is shown ( courtesy : Credit Derivatives, George Chacko and others, Wharton School Publishing).

It doesn’t end here. Investors further bundle payment rights and issue securities and this continues over and over again. The final buyer may be 4 to 5 layers down. It doesn’t even end here. The big buyers of these securities then bundle many such securities (say many MBS’s), create a pool and securitize that.These securities or bonds, which in themselves are backed by bonds, are called collateralized debt obligations (CDO). If they are backed by bank loan receivables, it’s called collateral loan obligation (CLO) and so on. Many more complexities have been introduced but essence remains the same. They are all pass through. Structured Investment Vehicles (SIVs) are similar to CDOs, except that they even bundle CDOs and further issue securities, which generally are of shorter tenure (one form could be commercial paper). They try to make money on arbitrage of interest rates between short-term, highly rated paper, they issue and long term underlying paper. They are also referred as 'conduits', rightly so. They employ great amount of leverage and are sought of unregulated. Another feature of CDO is layering of securities i.e. while securitizing, various classes of securities are issued – broadly classified as super senior, senior and subordinated ( also called mezzanine or junior notes) and equity (unrated). Super senior (and sometimes senior) bonds are generally rated AAA and subordinated (and senior if there is a super senior) could be anywhere from AA to B and equity tranche is unrated. Yields vary according to the ratings, obviously lower the rating higher the yield. In bankruptcy, losses are allocated to lowermost class and moves up the line as it exhausts, last one being the seniormost bond. The total CDO market in 2008 was approx $2 trillion.

These securities were rated by credit rating agencies (S&P Moody’s etc.), which made it easier for investors as it met their investment requirements. Infact they were generated and tailored such. For originators, as most transactions were being done on non-recourse basis, these got offloaded from their (bank) balance sheets, thereby considerably reducing their risks. The offloading (sale to SPV or another buyer) resulted in upfront profit booking, which proved to be big incentive and tempted them to do more.Originators were able to raise money through this alternative route and showed impressive results as they went on booking profits, and kept impressing stock markets (and their stock prices) which got earned them more incentives. Remember those million dollar bonuses. They repeated the cycle of more origination (pushing more money to consumers), more securitization and more profits. The scale, in trillions of dollars if one adds up all types of collaterals. Later on, though the pools were not as robust, credit rating agencies, an equally big culprit in the game, still assigned high ratings to them, possibly in lure of hefty fees they made.Remember it is seller (who gets securities rated) who was footing the bill and not investor.Investors world over invested in these security receipts in greed of higher yields.

In recent years however law relating to securitization has undergone tremendous change. In India, profits cannot be booked upfront and needs to be amortized. Further credit enhancements need to be provided along with the pool. True sale requirements (sale to SPV) have been made stringent.

So armed with these concepts lets see what happened. Since the recovery was on the back of asset bubble, it collapsed. When the prices of houses took a knock, correcting by over 40%-70%, the sub-prime segments and other variants started defaulting. As a result, all the securities and CDOs started experiencing cash flow problems. All those bonds and CDOs lost value and organizations owning them (the SPVs, the investors, the banks or hedge funds themselves) started experiencing losses. S&P revealed that, under its new recovery assumptions, any class rated A or lower would likely suffer 100% losses and the losses on AA-rated slices would be 95%. The junior AAA-rated tranches expect to lose 65% and even the riskless super-senior AAA tranches will suffer losses of 40%. Hence securities which only had sub-prime (or it variants Alt-A and other adjustable rate mortgages) pools lost almost entire value and organizations owning them took severe losses and eventually collapsed starting with Bear Stearns. Since these securities are marked-to-market (MTM - in accounting for fair representation these assets are valued by their fair market value rather than book value), they led to huge accounting losses. Due to multiple packaging, questions arose on actual valuation of these CDOs, causing further loss of confidence and value erosion.

Investors world over have far taken losses running over $500BN and have led to collapse of investment banks like Bear Stearns, Lehman Brothers and Meryll Lynch, insurance giant AIG, largest US Banks like Wachovia and Washington Mutual, big consumer finance institutions like Countrywide, government backed FIs like Fannie Mae and Freddie Mac (both nationalized). Surviving investment banks lost their identity and has been converted to full time banks with government pumping equity) and many structured investment vehicles evaporated overnight. Citibank was on its knees and was saved by last minute intervention. Rating agencies, S&P and Moody’s, reputation is blown to pieces. Conglomerates like GE are facing heat because of GE Capital. The story is no different in UK, Australia, France, Germany etc. Due to globalization and increased velocity, these securities found its place everywhere.

We have talked only about mortgages.We have credit cards and leveraged bank loans which again run into trillions of dollars. As unleveraging continues, the securitized papers will lose value (due to cash flows and MTM) and deepen the crisis.

All this has resulted in seizure of financial markets. Loss of trust confidence have sucked out liquidity from the system and brought the financial world to grinding halt. Stock markets world over have collapsed to 1/3rd of their highs. Economies have started contracting. Industrial output is falling. Exports are declining. Margins are going down. Losses are piling up. It has started hurting the real economy ( income, consumer spending, employment etc. ) and is only getting chilling with every passing day. One must remember while equity didn’t give them the upside, the debt needs to be serviced and stands at value. Wealth generated over last ten years has been lost. Millions have been shown pink slips.

Probably an attempt to save a milder recession in 2000-01 only postponed the problem leading to a deeper recession. The European economists were right. Joseph Schumpeter, in a 1942 article, argued that recessions are a process of creative destruction in which inefficient firms are weeded out. Only by allowing the “winds of creative destruction” to blow freely could capital be released from dying firms to new industries. Had this been allowed when it was milder, we may have saved ourselves from todays all-engulfing seizure.

Lot or learnings for everyone, especially for us as professionals. It will worsen before it gets any better. India is not immune either in this globalized economy. End of the day, philosphy reins in, making money is not bad, making obscenely is.

Monday, December 01, 2008

Last week was one of the sad and disturbing weeks of my life. The dastardly terror attacks on Mumbai left all of us very shocked, angry and frustrated.

The scale and sophistication of attack was unprecedented. Different access routes, loads of ammunition to survive days of fighting, simultaneous attack on multiple locations - some of them iconic landmarks and aiming of diverse nationalities leading to brobdingnagian damage to life and property. Indiscriminate firing on innocents commuters at VT, guests at Taj and Oberoi and the Nariman House, a Jewish settlement, has left approx 200 dead and 300 plus injured. Infact the damage goes beyond those dead, it has left everyone alive, scared and vulnerable.

The battle was witnessed live for 3 days on TV bringing Mumbai massacre right into our homes. It collapsed the sense of distance and made everyone part of the city. It’s their city, which was burning. Everyone was a Mumbaikar.

Over weekend, we have been talking about this with friends. The more one talks more the frustration, as it leaves so many unanswered questions, which basically points to the callousness and criminal negligence on the part of political leadership across spectrum. It’s their failure, which is exploited by administrative leadership who take it easy. The ‘chalta hai’ attitude and with money changing hands, politicians and administrators collectively have become spineless craven retards.

This is not the first time that political leadership failed us. This whole year we have been haunted by terror with blasts happening at Ahmedabad, Jaipur, Bangalore, Delhi. Still nothing was done other than customary sound bytes around maintaining peace and praising resilience of masses. On our part, we never protested and pushed for accountability. We chose to go on with our life. A collective sterner response would have yielded different results. For the first time the public response has left the political leadership ducking for cover. We shouldn’t forget this tragedy and keep the heat on the politicians till they perform to our satisfaction.

Such terror attacks also have other collateral damage - Inbound tourism, investments, slowdown, negative sentiments, lost days, lost productivity, cancellation of events, hotel occupancy, travel – everything gets affected. Coming on top of economic slowdown, the affect could be devastating for us.

Couples of steps, which government must take:

1. Stepping up intelligence. RAW should be strengthened. Investments in intelligence infrastructure should go up. Co-ordination amongst various intelligence wings should be stepped up. Probably there should be a central authority that should command all intelligence wings. Mechanisms to increase co-ordination amongst state and central agencies should be put in place.

2. Police reforms should be carried out immediately. They need to be de-politicised and paid better. Politicians have been misusing them for too long.

3. National policy towards terrorism should be put in place. No negotiations should form part of that.

4. Response infrastructure for all the cities should be put in place. Tier 1 cities, major hubs and installations including industries should receive help within 60-90 mins.

5. Lawmakers should immediately pass tough anti-terror law. We have been procrastinating this for too long. State governments should enact similar legislations.

6. Post event trials should be swift. Need to visible with our actions. Afzal, who attacked the Parliament, has still not been hanged though SC has confirmed the sentence twice. No one should have authority to Pardon. What signals are we sending?

7. Cabinet Committee should have Leader of Opposition as one of the participants. Have to take everyone along.

We on our part should be prepared to shoulder increased cost of security and gracefully accept the inconveniences due to increased security measures.

The only silver lining in this dark cloud is that it has bonded the citizens. Anyone talking about religion, cast or regional partisanship is a treasonist. It’s all about being an Indian. Hopefully the sacrifice of our countrymen will not go waste and create a stronger and peaceful India.